IMF chief: Global economy under 'veil of uncertainty'

October 11 2012, 15:03

Managing Director of the IMF Christine Lagarde says the global economy is fighting a new age of uncertaintyThe global economy is under a "veil of uncertainty" as economic issues grip the U.S., eurozone and developing markets such as China, the head of the International Monetary Fund said Thursday in Japan.

Christine Lagarde, the managing director of the IMF, said that while "more difficult to analyze and pin down," elevated levels of uncertainty are resulting in slower growth. "We need action to lift the veil of uncertainty."

Moreover, the world banking system is still in danger four years after the bankruptcy of Lehman Brothers helped catalyze the 2008-2009 financial crisis and still haunted by an unregulated "shadow banking system" of hedge funds and non-regulated derivatives trading.

The global financial system is "on the road to being safer, but not yet safer," Lagarde said in an interview with CNN on the sidelines of the IMF meetings being held this week in Tokyo. "I think it's attributable to the fact that (the banking system) was so damaged to begin with -- it was such a massive shock to financial institutions that it actually took a while to measure the depth of the difficulty and the scope of the changes that have to take place.

"Added to which you have this shadow banking system that is nicely developing around the highly regulated sector -- so that's clearly an area where regulatory supervisors will have do their job," Lagarde added. "I'm concerned because if you look at derivatives, there's a lot we don't know, there's a lot that's not transparent, and that supervisors should know about."

The IMF downgraded its 2012 forecast to 3.3% global growth -- with 1.3% growth predicted for advanced economies and 5.3% in the emerging economies - earlier this week. What is different about this global deceleration, Lagarde said, was that "this is not only affecting advanced economies ... it's also having a ripple effect among developing economies, especially Asia."

During the 2008-2009 financial crisis, developing economies like China led the rest of the world to a return to growth. But the growth was at an anemic pace for the developed world, characterized by high unemployment in the U.S. and the sovereign debt crisis in Europe, which threatened the fabric of the 17-nation bloc united under the euro currency.

While recent moves by central banks -- like last month's unveiling of a bond-buying program by the European Central Bank to ease eurozone crisis concerns -- "creates momentum" for a recovery, "courageous, cooperative measures" are required to eliminate systematic risks to the financial system, Lagarde said.

U.S.debt and "fiscal cliff" -- a January deadline $7 trillion worth of tax increases and spending cuts -- is also creating uncertainty. "What is the strategy of the United States when it comes to its debt, when it comes to its deficit? The world doesn't know and the world wants to know," Lagarde said.

Meanwhile, the regional territorial dispute between China and Japan -- which resulted in several key Chinese finance officials bowing out of the IMF meetings -- adds to the economic insecurity, Lagarde said.

"Any uncertainty, anywhere in the world hurts. To the extent that you have geopolitical uncertainty -- it hurts. And if it's in that part of the world where there actually is growth? It hurts."